INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s (PChem) 4QFY18 earnings expanded by +27.9%yoy to RM1.29b

• 4QFY18 PUR sustained at 94% due to good feedstock and asset reliability

• Product volume grew by +4.0%yoy to 2,684MT in 4QFY18

• Average product prices increased on strengthening global crude oil prices and weaker Ringgit

• Maintain BUY with unchanged TP of RM10.23 per share

Sustained PUR at 94% despite turnaround activities. PChems’ 4QFY18 earnings expanded by +27.9%yoy to RM1.29b. The commendable profit is premised on sustained revenue growth of +6.8%yoy to RM5.1b. The upbeat sales figures are a result of: (i) PUR of 94% and; (ii) higher average selling prices (ASP) due to higher crude oil price. Product volume grew by +2.0%yoy to 2,684MT for 4QFY18 compared with 2,643MT in 4QFY17. PChem also registered its highest production volume so far at 10.4kMT from 10.1kMT in FY18.

Earnings beat expectations. FY18 normalised earnings of RM4,979m beat ours and consensus expectations at 110% and 106% of FY18 full year earnings estimates respectively. Overall PATAMI margin sustained at a healthy level of 25% for the quarter.

Olefins & derivatives. 4QFY18 segment revenue and profit grew by +8.6%yoy and +8.8%yoy respectively. Segment PUR was at 100% while average product prices increased by +10% in-line with strong crude oil prices. Ethylene production for the quarter was at 270kMT +1.0%yoy).

Fertilisers & Methanol. Both segment revenue and profit surged by +2.0%yoy and by +34.0%yoy due to (i) higher average product prices from higher crude oil prices and; (ii) weakening of MYR against USD during the quarter. Plant utilisation was lower at 89% during the quarter due to planned turnaround activity undertaken at both its urea and methanol plants. The surge in profit is mainly attributable to lower tax expense and higher share of profits from joint venture and associate. Urea production was at 509kMT (-18.0%yoy) while methanol production was at 586kMT (+33.8%yoy) mainly contributed by PC Fertiliser Sabah which registered its first full-year contribution in FY18 since it began commissioning in May 2017 with a PUR of 95%.

PUR of >90% expected despite turnaround activities in FY19. Management guided that FY19 will be another year with heavy turnaround activities. Despite this, the average PUR for the group is expected to remain above 90%, similar to that of FY18. For FY19, PChem is expected to undergo five statutory turnarounds with the bulk of the turnaround will happen in 1QFY19 and 3QFY19 where we expect the PUR to be below 90% as per FY18. Going forward into FY19, the CAPEX will be 50-60% of its FY18 CAPEX.

Declared second interim dividend of 18.0sen. In line with its higher earnings, PChem has declared a second interim dividend of 18.0sen for the quarter under review. This brings its total dividend declared to-date to 32.0sen or 52% payout from its FY18 earnings. This also translates to 3.5% yield to yesterday’s closing price. Going forward, Management reiterated that it is committed in paying out at least 50% of its earnings as dividends.

Impact on earnings. No changes made to earnings estimates as we are expecting product demand mainly for its olefins and derivatives segment products is expected to soften given ample supply coming from the Middle East and North Asia. This could also be further exacerbated by a stronger Ringgit against USD.

Remain sanguine on company. Moving forward into the year, the group’s overall PUR will be under stress owing to heavy turnaround activities. Nonetheless, management still expects total product volume output to be above 10kMT, comparable with that of FY18. In addition, management also expects profits to be on par with FY18 premised on stable demand, strong asset reliability and favourable crude oil price.

Recommendation. We are reiterating our BUY recommendation with an unchanged target price of RM10.23 per share. Despite the overall stable outlook, we opine that earnings growth is limited going into FY19 due to the heavy TA and lower PUR albeit >90% as production volume is expected to remain constrained. Our target price is derived from PER19 of 16x pegged to EPS19 of 55.6sen.

Source: MIDF Research - 26 Feb 2019